Regulatory Update: SEBI amends REIT Regulations to address fractional ownership in real estate assets

The Securities and Exchange Board of India (SEBI) through SEBI (Real Estate Investment Trusts) (Amendment) Regulations, 2024 dated 08 March 2024 (Amendment Regulations) has amended the SEBI (Real Estate Investment Trusts) Regulations, 2014 (REIT Regulations) to address the issue of fractional ownership in real estate assets. The Amendment Regulations introduced a new chapter in the REIT Regulations which will regulate the formation and governance of Real Estate Investment Trusts (REITS) which are of small and medium nature (SM REITS). We have provided the key highlights of the Amendment Regulations below.

1. Definition of REIT and SM REIT

1.1. The definition of REIT has been substituted to a more comprehensive definition that brings fractional ownership investments within its ambit. REIT is now defined as a person that pools INR 50 crore or more for the purpose of issuing units to a minimum of 200 investors in order to acquire and manage real estate assets. The investors are entitled to receive the income that is generated from such real estate assets without exercising day to day control over the management and operations of such assets. Further, SM REITS have been defined as a REIT that pools between INR 50 to INR 500 crores and has issued its units to at least 200 investors.

2. Eligibility Criteria for formation of SM REITS

2.1. The Amendment Regulations prescribe certain eligibility criteria for the formation of SM REITS. Some of the key eligibility criteria are:

(i) the applicant for registration of a SM REIT must be the investment manager on behalf of the trust and there must be a duly registered trust deed with its main objective as undertaking the activity of SM REIT through one or more schemes;

(ii) separate persons have to be designated as investment manager and trustee of the SM REIT;

(iii) the investment manager must be clearly identified in the application for grant of registration;

(iv) the investment manager must have a net worth of at least INR 20 crore, provided that not less than half the net worth must be in liquid form;

(v) the investment manager must have experience of at least 2 years in the real estate industry or real estate fund management and if the investment manager does not have the relevant experience then it must employ two key managerial personnel, each possessing at least 5 years’ experience in real estate industry or real estate fund management;

(vi) the investment manager must clearly describe the proposed activities of SM REIT at the time of making the application for registration; and

(vii) the SM REIT and the parties to the SM REIT are fit and proper persons in terms of the SEBI (Intermediary) Regulations, 2008.

3. Registration Process of SM REITs

3.1. To obtain registration, an application is to be made by the investment manager on behalf of the SM REIT in the form and manner provided in the Amendment Regulations along with the prescribed fees. For existing SM REITS, the Amendment Regulations provide for a migration mechanism, to register such platforms as SM REITs. Along with the application for registration of existing structures, a migration plan should also be submitted. SEBI, on being satisfied with the application and eligibility of the applicant, will grant a certificate of registration. The SM REIT is obligated to make an initial offer of a scheme within 3 years from the date of registration.

4. Conditions pertaining to initial offer of scheme by SM REIT

4.1. The Amendment Regulations also prescribe the conditions to be complied with for the initial offer of a scheme, such as:

(i) the investment manager is obligated to identify the assets proposed to be acquired or disclose relevant details such as features of the real estate assets in the draft offer document;

(ii) the minimum price of each unit of the SM REIT must be INR 10 lakhs or such amount as may be prescribed by SEBI;

(iii) the value of the real estate assets proposed to be acquired in each scheme should be at least INR 50 crore;

(iv) the investment manager must file the draft scheme with SEBI through a merchant banker;

(v) the draft scheme filed with SEBI shall then be made public for inviting comments by hosting it on the website of SEBI, designated stock exchanges and merchant bankers associated with the issue, for not less than 21 days; and

(vi) the scheme can be launched by the concerned SM REIT after addressing the comments posed by SEBI, if any.

5. Investment Conditions

5.1. The special purpose vehicle (SPV) of the SM REIT must exclusively own all assets acquired or intended to be acquired by the SM REIT’s scheme of which the SPV is the wholly owned subsidiary. The SM REIT’s scheme is mandated to invest at least 95% of the value of its assets in completed and revenue-generating properties, it is prohibited from investing in under-construction or non-revenue-generating real estate assets. However, up to five per cent in value of the scheme’s assets can be invested in unencumbered liquid assets such as investment in mutual fund, fixed deposit etc. Additionally, the SM REIT’s scheme is restricted from lending to entities other than its SPV, while the SPV itself is prohibited from lending to any entity.

6. Mode of fund raising

6.1. The scheme of the SM REIT may raise funds from any investor whether Indian or foreign by the way of issuance of units. However, the investment by foreign investors are subject to the guidelines of the Reserve Bank of India and the Government of India.

7. Minimum public unitholding and delisting

7.1. The minimum offer and allotment to the public in each scheme of the SM REIT must be at least 25% of the total outstanding units of such scheme. The minimum public holding for the units of each scheme of SM REIT must be satisfied failing which action may be taken by SEBI and the designated stock exchange including delisting of units.

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